HBRD was traditionally a Hybrid portfolio, however in recent times, the manager, Coolabah Capital run by Chris Joye has moved more towards debt securities (senior & subordinated debt) holding the view that after a very good run for Hybrids, they have become relatively less attractive than lower risk debt. In other words, the yield differential between a higher-risk hybrid relative to a lower-risk subordinated note or bond had contracted to a point that it no longer made sense for the portfolio to mainly focus on Hybrids, even though they still pay a higher return.
- As it stands, the portfolio now holds ~30% in Hybrids, with the balance in senior and subordinated bonds. We can understand the rationale here and concur with their thinking. While we still like hybrids, we liked them more when they were paying 3-4% over the bank bill rate versus the ~2% currently being offered.
What we’re less keen on is the fee structure for HBRD, with a 0.55% annual management fee in addition to a 15.5% performance fee on any gains above the benchmark, which is the Solactive Australian Hybrid Securities Index. The portfolio now has a gross running yield of 6.34%, though that doesn’t take into consideration any capital losses that will be incurred for securities bought above par, so that return is on the optimistic side. Over the past year, the portfolio has returned 6.95% – not bad, 4.03% per annum over 3-years and 3.61% pa over 5 years. We assume no performance fees would have been paid, given that it’s running below the benchmark on almost all time frames.
- While we think this is a solid security and many investors like it, with around $2.3bn in the fund, we believe there are better places for income at this point and we’re assessing our current holding in the Core ETF Portfolio
